Schwab CEO Walter Bettinger announced the cuts at a company town hall, according to a report in The Wall Street Journal. The cuts are expected next week, the Journal reported.

“We initiated a process to review our expense base to ensure we remain well-positioned to serve clients while navigating an increasingly challenging economic environment,” a Schwab spokeswoman told the Journal.

The jobs cuts are expected in Schwab’s retail division, which includes financial advisors, though the cuts aren’t limited to that division, the Journal reported.

The back story. Schwab (ticker: SCHW) derives more than half of its roughly $10.7 billion in annual revenue from interest income. The company reinvests customer brokerage account cash into higher-yielding securities such as Treasuries and government agency-backed mortgage securities. Schwab has been shifting customer cash out of money-market funds in brokerage “sweep” accounts (where cash automatically sweeps from one use to another) onto its balance sheet. That enables the firm to invest the cash and profit off the interest rate spread between the yield it pays on cash deposits and the interest income it earns from lending and investment (subject to federal capital and liquidity requirements).

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Interest income has become a much larger part of Schwab’s overall revenue as rates increased and other revenue sources, such as trading commissions and asset-management fees, declined because of industrywide fee pressure.

But with rates now potentially heading down, Schwab will have to either find other revenue sources or cut costs, or both, to protect its profit. In one recent move, the company signed a deal to acquire 1 million accounts holding $90 billion in brokerage and managed-account assets from USAA, the financial-services organization for military families. Part of the rationale for the acquisition was that Schwab could move cash held by USAA customers onto Schwab Bank’s balance sheet, where it could be reinvested.

What’s new. Analysts viewed Schwab’s job cuts positively. “While this action isn’t too material it is not surprising given the significant down move in interest rates that has occurred over the last few months,” Wells Fargo analyst Christopher Harris wrote in a note on Wednesday. He expects other online brokers to reduce costs and said a renewed focus on cost would be a welcome development, because “expenses across the industry grew fairly materially” as interest rates increased.

Harris recently upgraded Schwab stock to Outperform and raised his price target to $50. Shares closed on Tuesday at $41.95, up 1% for the year.

Looking ahead. Schwab’s reliance on interest income has made its stock an interest-rate proxy. Wolfe Research analyst Steven Chubak estimates that Schwab’s stock is now 86% correlated to changes in the 10-year Treasury note. When the 10-year yield falls, so does Schwab’s stock, and vice versa.

But Chubak sees upside in the stock. He recently upgraded it to Outperform, arguing that the stock is even more highly correlated to earnings revisions, which “should inflect positively, barring a recession.” Cost cuts will help. And as rates come down, brokerage customers are less likely to shift cash into higher-yielding money-markets or fixed-income securities; that process is called “cash sorting,” and it has been a headwind for Schwab as rates increased. But there are signs that it is abating.

“Investor sentiment on SCHW is quite negative but we see a compelling opportunity to own a best-in-class franchise trading at a bargain level price,” Chubak wrote in a note on Sept. 3. He has a $46 price target on the stock.

Shares were up 0.2% to $42.04 Wednesday morning, in line with gains in the
S&P 500.

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